Investor Decision Making: Risk and Uncertainty and Why the Distinction Is Crucial

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Investor Decision Making: Risk and Uncertainty and Why the Distinction Is Crucial

Financial markets, like other markets, are where supply and demand meet and price discovery takes place. And when financial asset prices are discovered, the market fulfills another important function – it prices risk. A price, in turn, can be interpreted as an implied probability-weighted average of all possible outcomes. It is intuitive, therefore, to approach fundamental valuation by running this logic in reverse; identify possible outcomes, determine their impact and…

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